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IIP Numbers: Green Shoots Or Fluke?

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A big surge in manufacturing output pushed India's industrial growth to its highest in more than a year in October, a sign that Asia's third largest economy may have turned a corner that strengthens the central bank's case against a rate cut.

Encouraged by the 8.2 per cent growth in industrial output in October, Finance Minister P Chidambaram that it reflected emergence of "green shoots" in the economy. "I am very encouraged by the indications of the green shoots in economy in terms of production. IIP figures are very encouraging", he told reporters in New Delhi.

However, industry is not ready to be so optimistic about the figures. Industry body Confederation of Indian Industries' (CII) DG Chandrajit Banerjee said every year, prior to the festive season IIP picks up and then there is a drop. Therefore, it would be too early to say that a turnaround is underway.

HSBC Global research pointed out that industrial more-than-expected rise in IIP partly reflected the favourable base effect due to last year's October timing of the Diwali. However, this base effect is expected to reverse in November. But there are signs that the underlying growth momentum may be stabilising. But HSBC ruled out rate cut by RBI as inflation was still too high for comfort and rising.

Indranil Pan, Chief Economist, Kotak Mahindra Bank said this number was unlikely to change the direction of India’s growth dynamics. Investment revival remain on the slower side while the consumption side may now be stabilising.  He also did not expect any rate cut by RBI before January.

The factory output, as measured by the Index of Industrial Production (IIP), soared to 16-month high of 8.2 per cent in October on good performance of the manufacturing, power sector and higher output of capital as well as consumer goods, indicating sudden recovery in the economy. It had contracted by 5 per cent in October in the previous fiscal.

So far this fiscal, Chidambaram said, IIP had shown positive growth only in May at 2.5 per cent and August at 2.3 per cent.

"Let's see what the next four months bring us. Investments are taking place, capacity is being created and consumption is happening in consumer durables and non-durables", the minister said.
He said that intermediate goods, a good indicator of future production, grew by 9.4 per cent. "Capital goods output at 7.5 per cent is very encouraging. Since April it was in negative. This is the first month of positive growth", he added.

The capital goods output, it may be recalled, dipped by a whooping 26.5 per cent in October 2011.

The manufacturing sector, which constitutes over 75 per cent of the index, grew by robust 9.6 per cent in October, as against a contraction of 6 per cent in same month last year.

The Reserve Bank of India (RBI) has kept interest rates on hold since April because of stubborn inflation, defying calls from business and politicians for help in fighting a slump that has dragged the economy toward its slowest growth in a decade.

The index of industrial production (IIP) grew 8.2 per cent annually in October, data released by the Central Statistics Office showed, well above the 4.5 per cent forecast by a Reuters poll.

October factory and mine output showed the strongest growth since June 2011, after IIP growth spent most of this year close to, or below zero per cent. However, the industrial index is a volatile indicator that often lurches violently.

Economists said the rebound was largely due to a low base a year earlier, when religious festivals closed factories.
"We should be careful in not over-interpreting this number. With some shifting of festivals in October and more number of working days, we should see some payback in November," said A. Prasanna, an economist with ICICI Securities.
"That said, there are enough signs of optimism. A lot of supply side issues that were there last year, seem to have gone away."
India's year-on-year rate of GDP growth has been below 6 per cent for the past three quarters, damagingly sluggish for a country that aspires to at least 8.5 per cent annual expansion to provide jobs for its burgeoning population.
This year's sharp slowdown prompted Prime Minister Manmohan Singh in September to push through some of the boldest reform measures of his eight-year tenure despite political opposition, trying to jolt the economy back to more rapid growth.
Those measures have revived domestic markets but until now had not been felt in the wider economy.
Taming Inflation
The turnaround in industrial output, which contracted a revised 0.7 per cent a month earlier, was helped by a revival in infrastructure development, where the government has been trying to clear red tape restraining large projects.
Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 per cent to overall GDP, rose 9.6 per cent from a year ago.
Persistently high consumer price inflation, reported on Wednesday at 9.9 per cent in November, will provide more ammunition for RBI Governor Duvvuri Subbarao to maintain a hawkish monetary policy stance at a policy meeting on December 18.
The central bank has said any interest rate cut is "highly improbable" at the meeting next week, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September. Some economists expect a cut in cash reserve ratios (CRR) for banks, to help liquidity.
Any data signals that the economy is past the trough of its slowdown will bolster the RBI's case that taming inflation should take precedence over reviving growth in its rate-setting policy.
November wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy than the relatively new consumer price index, is due to be released on Friday.
"With inflation likely at 7.8 per cent in November, a rate cut is ruled out in December. I do not expect any CRR cut also as the government is maintaining large cash balances with the RBI," said Sujan Hajra, chief economist with Anand Rathi securities in Mumbai.
Indian markets showed little reaction to the data as analysts dismissed the gain in output as a likely one-off and highlighted the volatile nature of the index.